TechTarget Inc (TTGT) 2020 Q3 法說會逐字稿

Good afternoon, and welcome to the TechTarget Q3 2020 Earnings Release Conference Call. (Operator Instructions)

Please note, this event is being recorded.

I would like to turn the conference over to Mr. Charlie Rennick, General Counsel. Please go ahead.

Thank you, Ashley, and good afternoon. Joining me here today are Greg Strakosch, our Executive Chairman; Mike Cotoia, our Chief Executive Officer; and Dan Noreck, our CFO. Before turning the call over to Greg, I'd like to note that some of us are joining you today remotely, and I would like to remind everyone on the call of our earnings release process.

As previously announced, in order to provide you with an update on the business in advance of the call, we posted our shareholder letter on the Investor Relations section of our website and furnished it on an 8-K. Following Greg's introductory remarks, the management team will be available to answer your questions. Any statements made today by TechTarget that are not factual may be considered forward-looking statements. These forward-looking statements are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast. Please refer to our risk factors in our annual report on Form 10-K and our quarterly reports on Form 10-Q filed with the SEC. These statements speak only as of the date of this call and TechTarget undertakes no obligation to update them.

We may also refer to financial measures not prepared in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures accompanies our shareholder letter.

With that, I'll turn the call over to Greg.

Great. Thank you, Charlie. We are seeing a clear reacceleration in our business as evidenced by us meeting our guidance in Q3 and are forecasting almost 20% revenue growth in Q4. For Q3 2020, revenue grew 7% to $36.2 million. Adjusted EBITDA grew 12% to $12.5 million. Adjusted EBITDA margin was 35%, up from 33% in Q3 2019. Long-term contracts represented 35% of revenue in the quarter. Adjusted free cash flow was $9.6 million, representing 77% of adjusted EBITDA.

For Q4 2020, we expect revenues to be between $42 million and $43 million. We expect adjusted EBITDA to be between $15.6 million and $16.4 million. We are optimistic about the future as we believe we are in the early innings of a very large opportunity as our customers focus on making the strategic transition to making their sales and marketing organizations data-driven.

We are cautiously optimistic that the reacceleration we are seeing as we close the year will continue into 2021. I will now open the call for questions.

(Operator Instructions)

Your first question comes from Jason Kreyer with Craig-Hallum.

Wondering if you can just spend a little bit of time walking through some of the enhancements that you've pushed out with the new prospecting product and then is that completely rolled out to everyone? Or is that more of something that's going to be scaled out over time? And then I guess my follow-up there would be just on the pricing increases that you've implemented, just wondering if you've gotten any pushback there or if people are seeing the incremental value in the platform?

Jason, it's Mike. In terms of enhancements, we're really excited about what we just rolled out for priority engine. I would say our September release was the largest update and rollout since the inception of the product. And let me just step back. When we talked about priority engine in the past, we really had a strong focus on working with corporate marketers. And marketers have a very specific use case or several use cases. They may have an ABM strategy, a nurture strategy, they want to build their database. There's a one-to-many type of approach. One of the things that we did in September rollout was we updated the user interface, and we really made it focused on sales use cases. And that was very key. Again, stepping back to the marketing side, we have account intelligence and account insights that we rank every week, week over week, day over day, and it allows our markets to target these accounts. And within those accounts, you have the active prospects who are the actual opt-in users.

What we launched was prospect level intelligence in September. And with that user face, which I'll dive into in a minute, along with that active prospect user level intelligence, this is really enabling and empowering our sales teams within our customers to understand the intent signals that the individual active prospect level, they can help rank and prioritize within their own territories.

So now if I'm a salesperson, I have 2 views, and I can toggle back and forth. I can look at my territory each day or each week and look at the list of accounts and rank them and prioritize them. And mobilize my selling efforts or calling efforts. But then I can quickly tap over and rank and prioritize the active -- individual active prospects within my territory. And I can create a call list immediately.

So for example, Mike Cotoia inside of Gillette may be the most active prospect in my territory, but Jason Kreyer inside of Craig Hallum could be number two. So it really enables better call, better sales interaction and better insights.

The other thing that we're really focused on is that we've had a tighter integration, and that's a big focus for us in our customers workflow. We've done a really good job on the marketing side, and we're really making good penetration on the sales side. And marketers and sales leverage data in different ways. As I mentioned earlier, marketers approach is a one-to-many, maybe an account-based marketing strategy, a nurture strategy. A rep worked in his or her territory. It has weekly call list and has their own workflow. And typically, it's within Salesforce.

So we have the visual force tab and integration into Salesforce. So now as I'm a rep, I can see all the intent and the insights at the individual active prospect level and at the account level, while I'm in my workflow. And if I've identified a new contact that's not in my current territory inside of Salesforce. I can click to add that contact seamlessly. So really building a cohesive and easy to use workflow for both marketing and sales, it has always been in our road map. I would say the September release has been really, really impactful. And just to give you some additional staff, which we talked about in the shareholder letter, we've seen our page views within priority engine increased by 80% since the beginning of the year. What I mean by that is our customers are on their priority engine, and we track all their usage.

The portal interactions from people who have self-identified as sales professionals within our customers is up 40% since the September launch. So we're pretty bullish on that, and we're going to continue.

We have a road map as part of your second question of additional features and functionality, a lot of it will focus on leveraging our customers' first-party data, along with our data. We have other key engagement offerings that we're going to be integrating into this as well. So we have a very robust product development road map strategy, and you'll see that come out in the first half of 2020 and continue to move -- '21 and continue moving forward. In terms of the pricing, we've built a lot of features and functionalities for our customers. And as I mentioned, the new user interface, the integration to Salesforce, some of the active prospect, individual intelligence that we provide. We have not had pushback on the pricing so far. So it's -- We see that as a positive sign going into 2021.

Perfect. A lot of good color there. Just 1 more for me. Wondering if you can unpack some of the commentary from the letter. You said that subscription offers kind of -- sorry, subscriptions offered more resilient or predictable model in the downturn. But then we've kind of seen the priority engine grow slow the last 2 quarters. So I'm just wondering if you can kind of unpack those 2 statements and give some more color on that.

Yes. Okay. I think I want to break that down into 2 things. When we take a look at the overall enterprise IT environment, let's take this back 5, 6, 10 years ago. Where a lot of our customers were selling, let's call it, traditional hardware, servers, storage, networks. Today, when you take a look at what our customers are selling to their customers, there's a big shift to digital transformation. Their customers have to move towards a digital ready environment, no matter who they are now. And when you start -- and that benefits our customers because it's no longer just selling a point in time product where their -- I don't want to dump and run and move on. They're selling an ongoing solution. So for our customers, it provides -- they have some visibility because IT has sort of moved away from a discretionary type of spend to more of a business, a continuous business type of investment. So for us, we look at it and say, our customers have better visibility into it. They've transitioned their business to meet and align with some of the current day needs in terms of IT and lot of business types of solutions. And it provides less volatility.

Again, if I roll the clock back 5, 6, 7, 8 years ago, if we were going through this pandemic and most of our customers were selling hardware, their business would drop significantly, and that would have a trickle effect on us. Now how does that relate to Priority Engine in our business? Because you're right, we have a subscription business, and we have nonsubscription business.

I think when we went into a pandemic, which we've entered into, the first product, the product that will have the most impact on that is Priority Engine. And when I talk about that, it really focuses around net new customer acquisition and renewals. So if you have a net new customer, it might be a smaller customer, they may not be ready to commit to an annual or a multiyear deal. If I'm another customer and I'm up for renewal, and I'm trying to navigate through this pandemic, I may not want to commit to another year or annual deal. But what we're seeing is, those customers not leave TechTarget, they are shifting towards our other products. Remember, our model has been in place for 21 years. Right, we at the heart of our business, we are a publisher of relevant content to help enterprise IT and line of business professionals, research upcoming projects. We are a cluster resource. We have a great relationship with our audience. Because we have -- there's a pure gift for the get. So as these folks, what we've seen over the last 6 months during this -- navigating this pandemic, we've seen a big increase in lead generation and other data product customers coming in and our goal on that is we will make sure we service these guys well. They view us as a trusted solution. We will then transition that into an integrated online campaign and ultimately take these new customers when there's more clarity and visibility in the market to an annual long-term data subscription model.

And I would say during that, I mean, our long-term revenue was 35%. I think we're holding pretty strong. I know we're up single digits on that, but being able to do that, capture the money in our other areas and then have a plan to get all these new customers into long-term subscriptions bodes well for us in the future.

Next question comes from Ryan Meyers with Lake Street Capital Partners.

So revenue came in above your guided guidance. So my first question is, what would you attribute most of that revenue be it to? Is it higher-than-expected spend from your global top 10? Or any color there would be helpful.

Yes. So we break down, Ryan. So we take a look at our customer mix. And if it's the -- our global top 10, we actually did see a little bit of an increase quarter-over-quarter, but they are down about 15% from previous years. All other customers are up 17% and 11%, respectively. Where we saw this if we saw -- we continue to see really good movement and acceleration in our international efforts. And that's across all regions. We have offices throughout EMEA as well as Latin America, and we also sell into APAC. And there's a couple of things that are accelerating the growth there.

Number one, our model, which has been in place for 21 years as a publisher has very consistent opt-in compliance, approved methodology for our registered members. It is a lot of privacy and compliance regulations that you've all heard about, whether it's GDPR, CCPA, CPR rate, that just came out in California. Having an opt-in database for your membership is critical right now as we navigate to that. So I think we've become, again, a trusted solution.

Secondly, we're seeing throughout those regions as well as now in North America, a transition of face-to-face event budget moving into online. So you see that heavily, it's prevalent in EMEA and APAC. It's also -- as well as in North America. I don't think that shift is -- I think that the face-to-face event business is going to be changed forever. I mean, I'm not saying it's going to go away. There should be some business that comes back. But what customers are doing, they're accelerating their digital strategy. Our customers are, and we may capture those with a lot of, like, I'll say, content syndication, content marketing, lead generation efforts because they understand that they still need to get in front of their prospects and their existing customers through digital methodologies and digital programs. They understand a TechTarget model of really investing heavily in content through our editorial investments, growing these communities, having active members who are opt-in registered members and so we're seeing a big increase in our lead-gen revenue in those quarterly or semi-annual campaigns.

But I'll go back to what I spoke to Jason about earlier, the -- this increase in net new customers provides a good opportunity for us because as they work with us on these lead-gen campaigns, we then have a playbook -- a game plan to integrate them into other offerings that we do and ultimately bring them into a long-term data subscription. So that's where we're seeing most of the growth in international, as you can see, our business is up 30%. We feel good going into Q4, as you can see by the guidance, and hopefully, that continues some growth in 2021.

Okay. That's helpful. And then last one for me. So you said in today's prepared remarks that you continue to see smaller customers hesitant to commit to the longer contracts. And I know you called that all last quarter. Have you guys seen any sequential improvement in this area?

Yes. I would say it's modest, but nothing to really improve on. If you look back at this, when we reported on Q2, that was right at the beginning of this, it was almost a lot of these companies just stopped -- they will not stop or really froze and had to really assess their budgets. A lot of these small companies are VC-backed firms, looking to cash from the hiring of a lot of people, and they had to navigate it. I think people are starting to see -- customers are starting to see that there is still a lot of uncertainty out there, but the world did not end. And they have to stay in front of their prospective prospects and customers. So we're seeing some of those folks to our product -- through our offerings continue to sign up for some longer-term deals. But if not, we want to capture them through our other deals and then transition them into long-term data subscriptions.

Your next question comes from Marco Rodriguez, Stonegate Capital Markets.

Just wanted to maybe see what your thoughts were in terms of the guidance and the impact of parts of Europe that seem to be kind of getting ready to going down into some form of a lockdown again. How are you guys kind of thinking about that and it's particular impact in Q4?

Right. I mean, this is -- we experienced this in Q2, right? A lot of folks added -- having a lock down across the globe and in Europe as well. They announced a recent lockdown in -- through a lot of Europe right now as the cases go up. In terms of how we predicted -- I mean, we are still seeing our customers who had previously allocated and budgeted for face-to-face events. They still have a need to get in front of their customers and their prospects. And they're looking to leverage, and all of our customers are, are trying to look to leverage the right data to help transition their sales and marketing efforts. I think this whole face-to-face shift -- face-to-face event shift, the field markers would -- most of their budget was allocated towards events, is now being allocated towards online, digital, data-driven. So we still have healthy projections for EMEA in Q4. Obviously, there's some uncertainty. I mean -- But as you can see, we've provided some relatively almost -- as Greg mentioned, in the shareholder letter, almost 20% growth overall, and that's growing across all regions, including EMEA.

That's helpful. And then how should we think about that international business as it relates to sort of mix of your offerings there, whether it's the movement from event to digital Priority Engine and kind of branding, how should we be thinking about that?

Yes. I would say I still think the international markets tend to drag, a little bit behind the U.S. markets in terms of marketing campaigns and services and leverage intent and leveraging -- purchase intensity on marketing and sales transformation. Well, I'd say, right now, with the COVID, the pandemic situation, I think it's accelerating a lot of these movements across the board right now. And people are going to reassess everything that they're looking at. So if I am the CEO or the CFO of a company, and I get through 2020, and I see one of our customers. And say, "Gosh, you know what, I navigated through this, in 2019, I spent X amount of dollars in events. But in 2020, I was able to navigate and I spent X minus 70%. I think that they're going to end up putting those budgets towards online to help scale, drive continuous interaction and even if it starts with lead generation and content marketing offerings, integrated with some of the brand solutions.

At the end of the day, our customers are really focused on leveraging the right intent throughout their marketing and sales cycles when they're in market. So I think Priority Engine plays a really good place in that as we start transitioning folks from events to content syndication, from content syndication to integrated online solutions, from integrated online, intent driven solutions to Priority Engine integrated campaigns. So I think it bodes well. Obviously, we'll know more in the next 90 days, as we finished the year, we talked to you guys in February on this, but I don't have a crystal ball, but I think this plays well for us in a long time.

Got it. And last quick question, kind of a high-level question here. One of your competitors recently announced an acquisition of a company that provides sort of an AI-powered buyer intent data solution. Just wondering if maybe you could share your thoughts on that technology and also how you might be thinking about this from a competitive standpoint?

Yes. I mean that competitor, they -- that was their -- we're talking about the same competitor. Right? I think you're talking about, is it ZoomInfo?

Yes. Yes.

Yes. So they acquired a company, a small company that talked about AI-powered, real buyer intent. That was their supplier before. So they acquired the supply. I think that's probably a smart move on their part, and I don't think it changes the offering. And when I take a look at it. They do a really good job around contacts and closing the contacts. If you take a look at what we're doing with it, what we have is -- we call real and first-party purchase intent. You have to start with investing in content. We are 100% focused on the enterprise IT market. We have the right engagements coming in. What we know, which people are looking at which vendor content or which editorial content or peer-to-peer content or doing a search on a very specific technology segment within a very specific region. Like that's real. It's very difficult to leverage things like third-party cookies or bidstream data that there's a lot of questions about that. It's only at the account level, and you really don't want to money the waters on that. So our approach is being very transparent.

Number one, as I mentioned. We focus on providing the right engagement signals, the intent signals, and we get that because of our content investment. And we're the largest place in the web where enterprise IT vendors publish their content through their marketing efforts. And we know 100% or we know we deliver 100% transparency. I can tell you those active buyers were on 1 of our 146 enterprise IT community websites. I can tell you what articles they read, I can tell you what vendors, white papers, they downloaded what webcast they viewed, what search terms they had and that's real and observed intent and engagement signals that will help power and transition our customer sales and marketing efforts to be become better data-driven and drive more opportunities earlier in their sales cycle.

Your next question comes from Aaron Kessler with Raymond James.

First, maybe just on the Q4 revenue guidance, I believe it implies about 17% to 19%. Growth, obviously, a big acceleration from Q3. Can you expand a little bit on this? Just how much of this might be the shift from events as you talked about price increases, any sales offering, normalization of IT spend, et cetera?

Sure. Yes, I think, first of all, some of it is being driven by the shift from events to online. No doubt about it, and we're seeing that internationally as well as in North America. I also think there's some catch up, some pent-up budget with our customers. That's very close to our customers. They've been very close throughout this entire pandemic. We've had the conversations with our customers. As they look to shift, they may have reduce their or eliminated their event budget, but they kept that budget, some of that budget within their coffers to make sure that they can leverage in -- if the world didn't end.

Our conversations have been pretty good right now where they have end of the year budget. They want to use it. They want to look at it, whether it's through content marketing, content syndication, lead-gen efforts. Conversations we're having with our clients, our targets viewed as a trusted resource. We know if we can't get to our customers or prospects in a face-to-face event setting. We absolutely know who we trust to get to them online and digitally and through intent offerings. So I think you're going to see a lot of that end of the year flush come our way. Those are the conversations we're having on it. And I don't think you'll see the price increase. You might see a little bit now, but a lot of that you'll see in 2021 and 2022.

Got it. Okay. Great. And just a quick question on the some additional sales features that you've added to Priority Engine, how should we think about how much this expands the TAM? And then kind of is there a go-to-market strategy to try to expand your relationships with with the businesses? And maybe good to get some color, how many sales people were using this versus marketing people previously as well?

Yes. In terms of expanding the TAM, I think we've done a really -- we still have a lot of runway with our marketing focus. Marketers are still in the early innings of transitioning and leveraging data to transition their efforts. And there a lot of different data signals out there. And I always refer to our data as very clean, very transparent. And so we're still going to continue to focus within our existing marketers -- marketing base. And our customers have several different use cases on the marketing side. They also have offices across the globe. We have a lot of runway of -- if somebody signs up for a U.S. license long sign up for LATAM license in France, Germany, England, APAC and break it down by countries. And we have a really good road map on that.

In terms of increasing it to the sales use case, that's important to us because marketing has a lot of focus on getting the right data, driving the engagement and marketing their solutions and their company. And they want to make sure that they bridge the gap from what they're doing and make a bridge over to sales. So sales is using that same data, understands the campaigns going on can really mobilize and prioritize and make this impactful. So I think we're very focused on making sure that we have a very easy to use sales application here, which is much different than the marketing application.

A lot of it will focus on some of our integration strategy into sales force. We have hired some folks to help out and train the sales teams within our customers and our marketers love that because of their sales teams are leveraging and seeing success out of their -- what marketing is investing in, in terms of Priority Engine, that only makes everybody happy. Then we've shifted to next year, part of this upsell is a seat license. So you have more sales reps use it, you're going to have more revenue on the seat license. And I mentioned in the shareholder letter, we've seen a a 40% increase in people that have identified themselves as a sales title within our customers using the portal since September. So over the last 30 days, we've seen a big success on that and a big growth on that. And we're going to continue that. That's a big focus. So I think it provides opportunity on both -- expands your TAM, expands the relationships that we have within our organizations. It connects the dots between marketing, sales, inside sales, outside sales, field marketing, so we still in a pretty good position on that.

Great. Maybe just quickly, I think in the shareholder letter, you mentioned Priority Engine, page views increased about 80% since the beginning of the year. Is that market big acceleration from what you're seeing maybe in 2019?

Yes. So a lot of it is -- yes. So we page views accelerated by 8 -- grew 80% from the beginning of the year. That's an increase from the previous year. We didn't report what the previous year was. We're seeing markets more engaged on that, different use cases, other people in the marketing team, some channel applications within our customer side to channel marketing. So we're seeing that. What we were really want to make sure we highlight. So that's important because we want people not only what visitor wants, what visitor wants. It's going to be part of their workflow. And that's been important for us with the marketing side. We learned a lot as we developed what we were doing in our strategy around making marketers -- have a marketers be very sticky inside of Priority Engine. And we apply those learnings to our sales use cases, in the user interface, in the integration of the sales force and into our customers' workflow. We're looking to expand upon that as well. So -- But the impressive number, I think, is when we finally launched this upgrade in September, on the sales use case, that we saw a 40% increase in people that have identified themselves as sales, not only going into the tool, but with repeat users and visitors using it multiple times, and we track all that data every day and every week. So I think there's a good opportunity there as well.

(Operator Instructions)

Your next question comes from Allen Klee with National Securities Corp.

I wanted to focus on looking at 3Q versus 4Q, what you're thinking about? And a few things related to that. One, with the international, I heard you say that there's more people buying, but they're not buying Priority Engine as much. It's more other of your products. And how do we get to feeling confidence that that's sustainable? And then also, with your Global 10 customers, you had said in the letter that they're up sequentially in the third quarter, and it says that you expected them to be up for the fourth quarter. Does that mean that in the fourth quarter, you expect them to be up year-over-year?

Yes. Good question. So let me step back on the international side. I said at the beginning, the international business is really doing well across all phases. We're seeing good growth in Priority Engine. But we're also seeing good growth on the lead-gen side. So our customers, it's not -- I think one of the questions was, if you have these small customers and there hesitant coming on, what will they do? In terms of international business, our priority engine numbers were up well, they drove the growth on the international side for the company overall. So we will continue to see success on that because, Allen, they are -- I look at each of those regions, whether it's APAC, EMEA or Latin America, there -- they lag behind the United States and tons of transition on the technology side and on the marketing side. They are starting to see an acceleration. So again, Priority Engine across all of our content marketing initiatives have done very well internationally throughout the last couple of quarters. I would say the only thing that hasn't grown would be our branding, but that typically comes from our top 10 global customers, and whenever there is a pullback, they will pull back on brand investment. But again, our brand revenue is typically between 10% and 14% of our overall revenue. It's not -- it's nice revenue to have, but it's not the revenue that we're focused on in terms of the overall long-term focus of the business.

In terms of the Global 10, I expect it to be bode in Q4. Sequentially, we expect them to grow, and we do expect them to grow year-over-year. We are seeing some penetration some of these accounts. We are looking at some nice long-term deals with some of these accounts. The one thing I will remind you is I never want to be relying on these out. They are -- they're a good portion of our business. But today, they represent about 20% of our overall business. 10 years ago, they represented close to 40% of our business. So if there was ever a pullback in a market like we could see now or there was a recession, that would have a material impact on us. Today, we have much better customer concentration spread across the Global 10 and all others. And that bodes well for us, not only short-term and long term. And you've been covering us for a while, you've known that, that's been a pretty big initiative for us to keep that around the 20% total customer share.

And last question. I heard you say that you thought that the price increase from Priority Engine, we would really see in '21 and '22. But did that -- or maybe I misheard that, did the price increase come mostly go in in September? Or does it get like kind of over time, it goes in with different customers?

Well, it goes in when customers are renewing or they start signing up for an annual subscription. So even if we got some customers that signed up now, they would -- which we have, they would only recognize 1/4 of that full annual subscription for the price increase. You'll see -- is we have November-December, people buy new annual or renew or by new annual subscriptions. Because it's ratably recognized, you're going to see that over the 12 months. And just where we are in the calendar year, it's -- we only have 2 months left, 3 months left. So you'll see most of that revenue in 2021.

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